B) Is maximum wage legislation the best way to reduce unequal distribution of income?

Maximum wage legislation would mean that there would be a cap on what different people could earn in different professions. For example a Doctor may be able to earn a maximum of £200,000 per annum whilst a footballer may be limited to £1 million per annum. Unequal distribution of income is were groups of the population are receiving a much higher income then others. For example in the UK the average income of 90% of the population as whole in 2012 was £12,969 whilst the top 10% was earning around £79,000 and the top 1% having an income of £271,888 [The equality trust income inequality in the UK report 2013]. There is an unequal distribution of the income here because the top 10% of the population are earning around 600% more then the rest of the population.

Maximum wage legislation could help reduce unequal distribution for several reasons. The main reasons is due to the simple fact that if the people at the top of the pay chart were to have caps placed on their incomes, then their incomes would most likely fall to this cap or below it and therefore the difference between the top and lowest incomes would be reduced. This would be a good way of reducing unequal distribution of income because unlike a minimum wage this legislation would be unlikely to cost firms money but in-turn save them money. This is because the firms would gain the surplus of the money already being paid to employees in comparison to the cap whereas a minimum wage can sometimes mean that firms will have to pay their lower paid employees more in order to match the wage. However maximum wage distribution could also lead to an increase of unequal distribution of income. This is because assuming ceteris paribus and the fact that there is no minimum wage, firms may decide to lower the wages of their lower paid employees. This is because placing a cap on wages could lead to a decrease in competiveness. Firms often use higher wages as way to compete with their competitors in gaining the best employees for their labour force and therefore if an industry was to lower the pay of the bottom end of employees they would be able to offer larger pay increases and make a lower wage seem more lucrative.

Another reasons a maximum wage maybe an effective way to reduce unequal distribution of income is because it will have a knock on effect and can reduce the pay gap on several occasions. This first is mentioned in the paragraph above. The second would be the fact that the money the firms save from possibly paying their employees less could be spent on increasing the pay of the lower paid employees. This would lead to a further decrease in the pay gap as not only are the higher earners earning less but the lower earners may be earning more. For example if a stock brokers wage was reduced from £500,000 to £250,000 the firm would have a £250,000 surplus in which they could use to pay their lower employees such as secretary’s or cleaners. Although this example is possible it rather unlikely, however in reality firms may choose to reinvest the money into the business. This could again lead to a decrease in the pay gap as it may allow them to increase their maximum productive potential and therefore employ a higher labour force giving more people the opportunity to enter higher paying jobs.

However increasing the pay of the lower skilled jobs could result in a lack of labour in higher skilled jobs. This is because there would be less of an incentive for employees to work harder and try go through education and training in order to achieve these higher paid jobs. This is however dependent on the elasticity of supply of labour for individual jobs because if a job was inelastic then it is unlikely that this would occur in the short run.

Also is can be argued that money is a commodity and that its value is subject to the infleucnes of supply demand. Therfore the possible increased demand that a maximum wage could bring about due to firms being able to employ more labour could lead to a situation where wage are kept below free market quilibrium levels, assuming ceteris paribus.

There are several possible alternatives that could be used in order to reduce unequal distribution of income. The main alternative is to introduce or change minimum wage legislation in order to raise the pay of low paid workers. This again could have a two tier effect. This first would be that the pay gap would decrease because lower paid workers may be earning more if the minimum wage was increased. And the second because the minimum wage is compulsory for firms they may have to cut the wages of their top paid employees in order to cope with the increase in wage rates. However it is more likely that instead of cutting wages a firm would instead decrease its labour size. This would lead to an increase in unemployment which could have an adverse effect on the equality of income as in general unemployed people will be claiming benefits and will therefore be earning less then if they had a job thus increasing the pay gap. Furthermore a minimum would also not help those who are unemployed and do not receive a wage. Although a minimum wage is likely to increase disposable income which can lead to increased spending within an economy and help an economy grow in comparison to a maximum wage which is likely to reduce average disposable income.

Another alternative that the UK government currently uses to reduce unequal distribution of income is different tiers of income tax. Currently any one who is applicable to pay income tax (e.g not students) and is earning an income between £0 to £35000 per annum have to pay a basic rate of 20% tax, people earning between £35,000 and £150,000 have to pay the higher rate of 40% and anyone earning above £150,000 have to pay 45%. This can help equally distribute income as people who are earning more are paying more tax and there income is subsequently decrease by a bigger percentage then this paying lower tax thus possible leading to a decrease in the pay gap.

The main advantage that both tiered income tax and minimum wage have over
In conclusion I believe that although maximum wage legislation would be an effective way to reduce unequal of distribution of income it may not be the best method in doing so. This is because although it would most likely reduce the pay gap in the labour force it would also have several negative impacts on both the economy and the labour force such as increases in unemployment and decrease in the number of people entering highly qualified and skilled professions many of which are vital to an economy such as brain surgeons. I believe that the most effective way to reduce unequal of distribution of income is a minimum wage. A minimum wage would be seen as lot more socially acceptable in comparison to a maximum wage as it is more ethical in ensuring people are paid to an acceptable standard and is still meaning that people will possible work harder to try and achieve a high income. Overall I believe that in order to effectively reduce unequal of distribution of income a combination of different methods should be used such as different tiers of income tax and both maximum and minimum wage.